Barrick Gold’s Big Copper Buy Speaks to the Future

May 3, 2011 4:25 PM ET

“Watch where the big companies make their direct investments and that is where the markets will follow.” That golden rule is what the head of investments at JP Morgan, Carl Van Horn, taught me some three decades ago. So I take Barrick Gold’s (NYSE:ABX) purchase of Canada’s Equinox Minerals for $7.6 billion, one of the world’s largest copper producers, a complete reaffirmation of my long term focus on hard assets of all descriptions.

The deal tells us much about the future of the world economy. For a start, it shows how much Barrick believes in the future price appreciation of not only gold, but the red metal as well. He obviously spoke to some hedge fund friends of mine who have been warehousing 100 pound copper ingots around the country at undisclosed locations since 2002, unwilling to liquidate until it hits $6 a pound. Barrick beat out a competing hostile bid from China’s Minmetals, which has been scouring the world to lock in its own long term sources of raw materials.

The deal also tells us something about Barrick. Peter Munk built this company up from a few depleted Canadian mines to the world’s largest gold producer, virtually overnight. His move to take off all his hedges in the futures market 18 months ago, when the barbarous relic was nudging through $1,050 an ounce, was one of the greatest management decisions in corporate history. But Barrick is now developing marginal mines in Africa and Chile, and it has clearly reached limits on its growth. The Equinox deal provides a strategic expansion of its existing copper production, which is often found alongside gold deposits.